By Mark Watts CFA, Investment Partner at LCP
The announcement was met with shouts of ‘rollback’ and widespread concern that we were sending mixed messages and weakening our climate pledges. Given that we are not ahead of the curve in terms of climate change, we are behind it - do we have the luxury of taking our time to let market forces-driven solutions bubble to the surface?
Emissions are, in economic terms, a negative externality, and individuals are notoriously poor at taking into account the costs to others of their activities. Governments, therefore, are required to intervene to regulate markets and correct for negative externalities. A point that I am sure the government understands and is uppermost in their thinking of what to do next.
Targets are challenging, challenging targets even more so. Some have argued that we (society) probably waited a little too long to get with the programme, but we are where we are, and as Plato said, ‘necessity is the mother of invention’. Targets and government deadlines globally in the energy transition space have driven huge leaps forward in innovation. The PM alluded to the innovations and technological advances that were accruing to the UK and specifically called out the servicing of offshore floating wind turbines. Absolutely. There are some fabulous and world-leading solutions that are happening with regularity in the UK, and we are able to implement them, commercialise them, and export that expertise as a result.
A concern we share is that by putting back our ‘deadlines’ to match those of many of our global direct competitors, we seem to be giving up some of that impetus and edge we had. Innovation will still occur, but ceteris paribus, we would expect the pace to decline to fit the new timescale.
The reality is that in many areas, companies that need to research, develop, and invest, will now be faced with that uncertainty until a new government is decided by the people. Do they hit the pause button, slow down, or change nothing? We won’t know the outcome until some months, but by our calculations, for example, an increase of just 1% WACC (Weighted Average Cost of Capital) will increase the cost of delivering the power generation infrastructure to meet net zero by £35bn. Uncertainty = risk. Risk costs.
What would we like to see now?
Forcing people into debt as they are required to make large capital expenditure decisions is clearly inappropriate, especially when rises in the cost of living are pushing countless over the poverty line. Perhaps there is a halfway position that we can get to in terms of a model some European countries have adopted where whole streets or areas are converted to a new heating system systematically and in a planned way. The government has the ability to do this and provide funding, in the same way they have just announced a 50% increase to the Boiler Upgrade Scheme to £7,500. This is welcome.
Also most welcome were the plans to invest in or create a more conducive environment for carbon capture, small modular reactors, and grid infrastructure (we have strong views on these). More money for funds to invest to help tackle climate change is also welcome, but we feel there is far more capital to be mobilised in the UK. The Mansion House speech and the Mansion House Compact give us some clear direction in terms of how we might activate UK patient capital. We continue to advocate that more should be done to free up capital to invest in infrastructure and the energy transition. We need to always keep an eye on other markets and what they are doing, as the demand for capital is global.
On balance, the rolling back of key headline initiatives may appear disappointing, even though they are partially rooted in individual economic realities. We will have to deal with the fact that the announcement will sow mistrust around pledges and create uncertainty around parts of the investment landscape. What we would like to see now, as the PM alluded to, is frank and open discussions on policy – with pace. This will ensure that any perceived slippage we have seen from the announcements is more than made up for by clarity in other areas that drive real investment and activity.
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